Why one strategist isn't buying into the market rally yet

Just a handful of tech stocks have been driving the recent stock market rise. But Adam Phillips, Managing Director of Portfolio Strategy at EP Wealth Advisors, isn't buying in just yet. Phillips says this rally needs an "asterisk" until we see broader market participation.

Video Transcript

RACHELLE AKUFFO: Well, joining us now with some tips to set your portfolio up for success is Adam Phillips, EP Wealth Advisors managing director of portfolio strategy. Thank you for joining me this morning. So I mean, we're seeing how equities have been faring so far this year. A lot of people wondering though, what are the red flags we should be looking for when you do have this concentration trade among these mega caps?

ADAM PHILLIPS: You know, I think that's a great question. We're talking about the fact that breadth in the market is so weak right now. You know, you look at the S&P 500 up about a little more than 11% this year, up now about 20% off of the October low. And so that's what we're-- what we're talking about with our clients, the fact that breadth is low. And really we're not buying into this just yet.

You know, we may be on the cusp of a new bull market here, but I think this bull market really deserves an asterisk until we see some broader participation. And you know, right now, we're just not seeing it. And so what we're telling our clients is to just remain positioned for some additional volatility and downside volatility from here.

RACHELLE AKUFFO: So then as you look at the broader equities market then, what are you honing in on?

ADAM PHILLIPS: Sure. Well, you know, we're looking at some of those players outside of the technology space. Obviously AI has really driven a lot of the strength there with those large mega cap companies. But we want to see broader participation outside of that.

Right now we are defensively positioned across our portfolios, so we still have an overweight allocation to the energy sector. It's an area that we feel has been rather unloved for a while. It was a source of outperformance last year, and it's taken a bit of a breather this year. And we still think that there's some opportunity there. Also focused on health care.

But I'd say the theme across our portfolios is really one of defense. And what we're waiting on, I would say before getting a little bit more optimistic or bullish in our outlook, is just some additional signs of strength in the market, you know? Broader market participation, more stocks trading above their 200-day moving averages. And so until we see that, I think we're going to maintain more of a cautious view.

RACHELLE AKUFFO: And it could be hard not to buy into a lot of this hype. I mean, pretty much on almost every earnings call you heard AI mentioned even if you didn't really get the details of how they'd be-- how we'd actually see the use cases for some of this technology. And you expect earnings to actually be revised down in the upcoming quarter. How should people be positioning their portfolios so that they can try and take advantage of some of these AI companies that do have some legs and some of the ones that they should perhaps more cautious on?

ADAM PHILLIPS: Well, you know, when you talk about AI, I think it's so interesting because, you know, this is a theme that is going to take years to play out. We won't know for quite some time whether it really is as revolutionary as many are hoping. And so I think it's going to-- it means it's going to be tough to pick a winner. I think if people want to play that theme, you want to focus on diversification as opposed to choosing that one winning horse.

Within our portfolios, we are-- we do have exposure to some of those larger names that are often discussed, some of those that have been more of the high-flying names. But you know, I'd say that right now we are mindful that some of these companies have-- we've seen their valuations really explode here. And so as far as being a good entry point, we'd be a little bit more cautious here. That's why we're not adding to it.

What we are more focused on within our portfolios is diversification. So with our clients, we're really just preaching about diversification. It's so easy to become enamored with today's-- today's leading story, which is really AI. And I think many would look to the recent winners and you look at-- you know, you look at a company like NVIDIA who recently joined the trillion dollar market cap club. I think many will worry that they're missing out on something.

And so what we're trying to educate our clients about is that history has proven time and time again that it's about diversifying your portfolio. It's OK to have some exposure to some of those names that may be the beneficiaries of that theme, but don't forget about the rest of the market because that really is just a small subset of the broader market.

RACHELLE AKUFFO: And what do you see as some of the biggest risks to the S&P in the back half of the year? I mean, we talked about the pain trade potentially of AI if you get, you know, overly excited about something that may not pan out. But you also have the ECB and the Reserve Bank of Australia also saying, look, we might have some more rate hikes ahead as well and maybe gauging what the US Fed might do.

ADAM PHILLIPS: I think the Fed is still incredibly important. You know, we're focused on a number of topics. You know, now that we have the debt ceiling behind us, I think it's just back to the-- back to the basics that we've been living with for some time now, and that's the Fed and the inflationary outlook. We are going to be watching China and US relations very, very closely.

Next week we have the FOMC meeting, the June meeting, and we believe that the Fed is likely to pause-- I think what we're going to be interested in is whether they signal a pause or I guess what we would call a skit, whether they're going to provide language to imply that this is not a pause in which the next move would be a cut in rate, but whether they're actually going to just take this meeting off, wait for some more information before proceeding with possibly additional rate hikes in the July meeting. And so I think there's a lot for us to remain focused on.

One of the things that you did bring up that we're watching very, very closely is the earnings outlook. So far it's holding up. I'd say earnings have proven more resilient than we would have expected. But we still believe that they-- projections are likely to move lower as time goes on here and analysts and corporations start to-- start to, I'd say, realize some of the pressures that they're up against.

RACHELLE AKUFFO: Especially if we do get that skip versus a pause. Thank you for bringing that up. Interesting context there. Big thank you there. Adam Phillips, EP Wealth Advisors managing director of portfolio strategy. Thank you for your time this morning.